New details come to light in agency pricing class-action lawsuit

The hits just keep on coming. On PaidContent, Laura Hazard Owen writes about a new filing in a class-action lawsuit against the agency pricing publishers that reveals some previously redacted evidence in the case shedding light on the agency pricing negotiations. This is the suit in which a number of states (now up to 31 including DC and Puerto Rico) seek monetary damages, in addition to the DoJ’s class action settlement.

In one case, Macmillan CEO John Sargent asked Apple if they might consider relaxing their 30% take for new-release “hardcover” e-books to help ease the pain of their drop in revenue under agency pricing. (Apple didn’t.) Later, after trouble getting one unspecified “Conspiring Publisher” to agree, Steve Jobs actually sent an executive at its parent company an e-mail, in which he said:

As I see it, [Conspiring Publisher] has the following choices:

1. Throw in with Apple and see if we can all make a go of this to create a real mainstream ebooks market at $12.99 and $14.99.

2. Keep going with Amazon at $9.99. You will make a bit more money in the short term, but in the medium term Amazon will tell you they will be paying you 70% of $9.99. They have shareholders too.

3. Hold back your books from Amazon. Without a way for customers to buy your ebooks, they will steal them. This will be the start of piracy and once started, there will be no stopping it. Trust me, I’ve seen this happen with my own eyes.

Maybe I’m missing something, but I don’t see any other alternatives. Do you?

Right, Steve. Never mind the fact that customers who think $12.99 and $14.99 are too high will still steal them. E-book piracy’s already started, and I don’t see any signs of it stopping.

And there’s also an interesting part in which an exec from Penguin leaned on Barnes & Noble not to do any more promotion or advertising of titles from agency holdout Random House until it toed the party line.

There’s not necessarily any smoking gun here, but plenty of stuff to make the publishers look just a little sleazier. It’s a shame this kind of courtroom proceeding takes so long to thrash out; I’d really like to know what happens when the publishers have their day in court.

TeleRead Editor Chris Meadows has been writing for us--except for a brief interruption--since 2006. Son of two librarians, he has worked on a third-party help line for Best Buy and holds degrees in computer science and communications. He clearly personifies TeleRead's motto: "For geeks who love books--and book-lovers who love gadgets." Chris lives in Indianapolis and is active in the gamer community.

7 COMMENTS

Actually, I see a perfectly reasonable alternative, and I don’t understand why the publishers haven’t adopted it.

I think that the publishers should set wholesale prices for their ebooks, and should sell copies to the ebook stores at the wholesale price. Each ebook store could then sell the copies at whatever markup the ebook store requires to cover the ebook store’s overhead and profit.

Competition between the various ebook stores would keep the retail price as low as possible, but the publisher’s income for each ebook that is sold would be known in advance.

Gary: that’s what the publishers had been doing. At the time, Amazon was pricing best-sellers below cost — typically paying about $13 wholesale for e-books they sold retail at $9.99 — and making up the losses on other products. Although Amazon started as an online bookstore, today they sell significantly more non-book products than they do books. And e-books were a trivial part of their business at the time, so they could easily afford the losses.

This practice was making it almost impossible for “pure book/e-book stores” to compete, because they couldn’t continually sell at a loss. As Jobs’ letter noted in item #2, a likely outcome would be that once Amazon had driven everybody else out of the e-book business, they’d “Wal-Mart” the publishers by demanding lower wholesale prices.

The proposed settlements would permit the publishers to include a “no sustained selling below cost” clause in their contracts. The allowed restriction is very broad: over the course of an entire year, the total of the discounts that a bookseller gives on a publisher’s e-books cannot exceed the total of the commissions earned on that publisher’s e-books. So Amazon can still sell best-sellers at a loss; they’ll just have to make it up with increased prices (reduced discounts) on other e-book titles from that same publisher, rather than on cameras, TVs, socks, and assault gear.

It doesn’t look good for the remaining publishers though I still see little for Apple to be worried about. They are not a publisher and I cannot see how a case can be made against them for fixing or colluding. The likelihood of the publishers looking just a little sleazier is not something for them to worry about. Their reputation with the public is far too low to suffer any further lowering.
Jobs, imho and for all of his genius in other fields, never really had much insight into the eBook market and his email is deeply flawed. His comment on piracy is idiotic in that the inflated prices of both 14.99 or 9.99 are both drivers for piracy. His concept that a major eBook success could be achieved with the prices he invisaged was also quite idiotic.

Howard, do you think that the manufacturers of a product can’t collude with one of the distributors to fix the prices to the detriment of the end-customer and at least one of the other distributors? The DOJ and the states attorneys general believe it’s possible.

Bruce – Of course I am not familiar with the US law … but it doesn’t make sense based on the small amount of reading I have done. It is the supplier that is forbidden from collusion to fix prices. I don’t believe the retailer has any responsibility in the matter and this is why Apple is fighting it so vehemently. Of course I probably haven’t a clue what I’m talking about, but it seems to me that the actions of the AG is in line with general strategies by US AG offices. They regularly come out like attack dogs in an attempt to intimidate their targets and get a settlement without ever having to go to trial. It’s a strategy that doesn’t happen here in my part of the world.

@Howard: The charges to the publishers and Apple are for participating in a conspiracy to fix prices on ebooks so as to *raise* consumer prices. *All* participants in the conspiracy are considered to be equally guilty, regardless of their role in the conspiracy. Submitted evidence suggests Apple was the communication channel through which the participants communicated and coordinated, possibly even the instigator.
Their specific role in the price fixing is not the issue; their participation in the conspiracy is.
To put it in simple terms: in an armed robbery of a bank, everybody in the gang is guilty–the driver as well as the gunmen. Even a team member that merely “cased the joint””. 😉
Make no mistake; Apple is as guilty as Penguin and co. when it comes to the conspiracy charges.
Now, how guilty that is is up to the court to dictate.
But reading the quoted emails it is clear that a quiet settlement is probably in their best interests.

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